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Does war in Iraq benefit our domestic economy?

Any war always affects every aspect of a country’s economy. The latest war with Iraq has proved to possibly be the longest war in the history of the United States and hence it is probably the most expensive war as well. There has been a long debate about economic effects of our war with Iraq. There are many questions and views about this. But, the most important issue is related to the costs and benefits of conquering Iraq. Does war with Iraq benefit our domestic economy? There are always two sides of every issue.

The same is true about this issue as well. This paper tries to find the answer of this question by analyzing the views of both the sides. Whether it was worth invading Iraq has become a frequently asked question now. But, before reaching to a conclusion, it is necessary to analyze the costs and benefits of this war. These costs and benefits include both, the tangible as well as intangible costs and benefits. There have been several observations and different people have different views about this issue.

However, it seems to be a bit difficult to reach to a clear conclusion about whether this war was beneficial for the domestic economy. Steven J. Davis, Kevin M. Murphy and Robert H. Topel of the University of Chicago were one of the earliest to do a cost-benefit analysis before the invasion in 2003. They suggested a continued policy of containment to be an alternative for invasion and change in regime. Assuming that containment and invasion would protect the United States equally well, the question of whether invasion is worth it turns on which policy is less costly, after discounting all likely future costs.

Allowing for a 3 percent chance that the Iraqi regime would evolve into a benign government in any future year and a 2 percent real interest rate, the economists reckoned that the cost of pursuing a containment strategy was $258 billion to $380 billion. Their anticipated price tag for the war, which they considered conservative, was $125 billion. Professors Davis, Murphy and Topel revised their figures later, in National Bureau of Economic Research working paper. Their estimated war costs have increased to a range of $410 billion to $630 billion.

However, this range is arguably grossly inflated because it counts virtually all of the American military forces in the Middle East as dedicated to containing Iraq. While containing Iraq was a central focus, these troops also served many other purposes. They conducted rescue operations, performed humanitarian missions, responded to terrorist bombings and were responsible for military activities in many countries. Additionally, Iran was considered to be a greater potential long-term threat than Iraq.

Hence, it is hard to believe that the United States would not have a substantial military presence in the region even if Iraq was not regarded as a threat. Ideally, only incremental costs would be counted in deciding whether something was worth it. The U. S. defense budget has risen over the past decade but remains substantially lower than historical levels when considered as a percentage of U. S. GDP. There are more than 1 million U. S. troops in Iraq. So, the cost of long-term medical care and disability benefits will naturally continue for years even after the war is over. Reconstruction after the war is also another inevitable factor.

This will add an even higher cost to the war. Overall the Iraq war seems to have destabilized the U. S. economy by causing an increase in the oil prices, inflation created as a result of greater demand of economic goods and services, uncertainty in the credit market and an increasing need to pay for the war with borrowed dollars. Five years since the US began its invasion of Iraq, the world’s largest economy is struggling to cope with the cost, which was estimated to be at least $500 billion and is still rising. Two of our prominent economists believe that the US economy and the Iraq war are now inextricably linked.

Authors of “The Three Trillion Dollar War,” Joseph Stiglitz, who is a Nobel-prize winning economist, and Linda Bilmes, argue that the Iraq war will cost the US at least $3 trillion and possibly as much as $5 trillion. Bilmes, who is an expert of budget and public finance said in an interview that “both in a long-term sense and a short-term sense, the United States is worse off economically speaking because of the war. In a long-term sense, we have already added about $800 billion to our national debt as a result of the borrowing and the war.

In the short-term sense, we are spending $12 billion a month in Iraq alone and that clearly limits the amount of money that we have, for providing things like economic stimuli to improve the economy. Our overall spending on domestic programs other than defense, such as education, highways and law enforcement, has grown, but since last few years, the funding for these programs represents a declining share of the budget and economy. One of the important effects of the Iraq war was the increase in the oil prices, which had once reached to $110, against $25 a barrel, before the invasion of Iraq.

” Similarly, prominent and mainstream economist, William Nordhaus in the New York Review of Books of December 5, 2002 estimates likely total costs to the U. S. of from $120 billion to $1. 6 trillion and possibly even higher. Hence, depending on the counterfactual situation that one chooses, a menu of cost estimates is available. “The question of whether the war was worth it hinges not on economic costs, but on what we gain in the way of genuine security and international standing”, said Douglas Holtz-Eakin. According to him, the costs are manageable.

However, the benefits seem to be much harder to quantify than the costs. Zbigniew Brzezinski, National security adviser of President Jimmy Carter says, “the benefits have been, in fact, very few, beyond the obvious one: the removal of Saddam Hussein. ” He said that the war undermined our international legitimacy, destroyed our credibility and tarnished our morality with Abu Ghraib and Guantanamo. But, there are others who say that $3 trillion is a price worth paying by the US. Robert Shapiro, a former undersecretary of commerce in the Clinton administration and fellow at the Brookings Institution is one of them.

He says the figure would be a small price to pay for stability in the Middle East. According to him, the success of this war means stability of the region and this $3 trillion debt over a period of time will be a small price to pay and one that the American people will pay gladly. The Chicago economists argue that anticipated improvements in Iraq’s living standard, once the country stabilizes, tip the balance in favor of invasion over containment, which in their view had costs that were “in the same ballpark.

” They also argue that the number of Iraqi fatalities since the invasion is probably no greater than would have been the case under Mr. Hussein. But, even if one accepts all of their estimates, their results implicitly raise another question: Why intervene in Iraq and not a country like Sudan, where genocide and oppression are at least as much an affront as they were in Iraq, and where the cost of intervention and prospects for improving lives may offer a better benefit-to-cost ratio than is likely in Iraq?

Others also argue that the real cause of the US’ economic woes is not the war in Iraq, but the sub-prime mortgage crisis and the housing market collapse. There are other links too, between the war and US economic crisis and decline. One is the misdirection of much of the nation’s industrial strength into war production. If investors see higher returns in military industries, they will shift their investments away from other industries, leaving them starved for capital.

We can see the results of this military-industrial virus in the failure of Boeing to produce its next generation jet, the Dreamliner, on schedule, in the pathetic performance of the nation’s dying domestic automotive industry, and in the failure of the country’s once vibrant entrepreneurial economy to do anything significant to tackle the challenge of global warming and the crying need for non-polluting, renewable energy sources.

One could argue that at least the war is providing jobs for some of the nation’s growing army of the unemployed, but that would be to ignore the wastefulness of the work, and the enormous needs facing the nation. How much better to use federal funds to employ people at projects like reforestation, wetlands restoration, teaching, highway repair, school construction, slum renovation, etc. , than at jobs involving killing overseas. Much of the rise in oil prices, of course, is only being felt by Americans, because it is an increase in the dollar price for oil.

For Europeans and Asians, whose currencies are appreciating against the dollar, oil prices are not rising, and may even be falling. So, to the extent that the massive US spending on a war funded on credit is contributing to the dollar’s collapse, that spending is leading to the soaring oil prices that are dragging down our domestic economy. People are worried by all this war and fear mongering, and people who are fearful do not invest and spend the way people who are confident about the future do.

This is an intangible thing, but it probably is a good bet that many Americans are putting off investments, whether in a new house or a new car, or even in a new business venture, because of fears of a wider war in the Middle East, or of an economic collapse here at home, or because of another jump in oil prices. There is an ongoing debate about the extent to which war spending affects a country’s economy. Experts disagree on the most fundamental point—whether war helps or hurts national economic prospects.

Apart from abstract questions about whether war spending is helpful or hurtful, economists also debate the specific economic impact of the current war in Iraq. The war in Iraq touches the U. S. economy in a variety of ways beyond the impact of direct spending. First, Iraq has a lot of oil, and swings in the country’s production levels have an effect on global oil pricing. By some estimates, Iraq has the second-highest amount of oil in the world, behind Saudi Arabia.

The Wall Street Journal reported in December 2007 that improving security conditions had allowed Iraqi oil production to return to pre-war levels. But the former Iraqi oil minister said in an interview with the Journal that maintaining current production levels would be a challenge. Whether Iraq is able to sustain—or possibly increase—its oil production, the fighting of the Iraq war ground production nearly to a halt in 2003. In the years since, production gains have proved choppy, as noted in a recent Backgrounder on Iraq’s infrastructure.

Geopolitical turmoil can also affect oil prices. Crude prices have spiked since the inception of the Iraq war, though experts say turmoil in Iraq is only one of several factors influencing this increase. Still, Iraqi production currently accounts for 3 percent of global oil production, and thus turmoil in Iraq can have a substantial effect on oil prices. This, in turn, bears heavily on the U. S. economy. Experts say some of the gravest economic effects of the wars in Iraq and Afghanistan are also among the hardest to define quantitatively.

Market analysts say rising energy prices combined with a falling dollar have already strained the budgets of U. S. companies and consumers, pushing the United States toward a possible recession. Rising oil prices also fan inflation, which remains at low levels in the United States but which experts say could emerge as a major economic issue, particularly if the U. S. Federal Reserve feels the need to make substantial additional interest rate cuts. Experts add, however, that should Iraq’s security situation continue to improve, future gains from increased oil production could help mitigate some of these economic pressures.

Credible estimation of counterfactual outcomes of alternative policies for cost-benefit comparisons has been a hallmark of modern economics. When it comes to judging whether war is worth it, however, cost-benefit analysis is little more than educated guessing by other means. But at least it provides a framework for where to put the guesses. In short, the Iraq War is having a profound negative effect on the US economy, in both short, and in long-term ways.

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